Wind power loses puff in planning

In the last of a two-part series, Eric Ng says infrastructure to tap captured energy is lagging headlong capacity expansion

Across the seemingly endless plains of Inner Mongolia, the changing skyline is something even the fearless medieval Mongol emperor Genghis Khan might be in awe of. Giant wind towers and turbines are being raised across this wild land and many more are eventually expected to dot the northern and western plains, where the nation’s most abundant wind blows.

Standing up to 30 storeys high with blades 40 metres wide, these giant machines are tangible evidence of the mainland’s push to wean itself off polluting fuels such as coal and develop renewable energy.

The National Development and Reform Commission (NDRC), the nation’s top economic policy planner, is expected to soon announce an ambitious plan to lift China’s installed wind power generation capacity to 100,000 megawatts by 2020.

That is more than three times the objective set in 2007, and eight times the 12,200MW capacity reached at the end of last year.

China looks set to overtake Spain this year as the world’s third-largest wind power market by installed capacity and Germany next year as the second largest behind top ranked the United States.

A large part of this growth is being driven by Beijing’s implementation of the Renewable Energy Law in 2006. The statute stipulates that all renewable power output must be bought by the nation’s two regional power distribution monopolies, which are required to provide the necessary power grid connections.

In addition, Beijing has imposed a surcharge on coal-fired electricity consumption to subsidise renewable energy, which is more costly to generate. Beijing believes renewable energy development will not only help control emissions and climate change, but create jobs and combat poverty in remote and undeveloped regions.

The equipment manufacturing, component supply, project development, installation and maintenance involved in each megawatt of wind-farm capacity can employ 15 people for a year, according to the Global Wind Energy Council.

The solar power sector could create 32 jobs for each megawatt of capacity installed, against one job for coal-fired projects, said Jean Francois, an energy equity analyst at Sustainable Asset Management.

The NDRC has planned for giant wind farms with at least 10,000MW of capacity in the Xinjiang Uygur autonomous region, Hebei province, western Jilin province, eastern Inner Mongolia, western Inner Mongolia and Jiangsu province.

Earlier this month, Gansu province near Inner Mongolia said the province would build 20,000MW of wind farms by 2020, exceeding the 18,200MW of the world’s largest hydro power project in the Three Gorges Dam.

However, the world’s fastest-growing wind power market, where capacity has doubled in each of the past four years, is facing infrastructure problems that could hinder its long-term development.

“If you happen to travel in Inner Mongolia, occasionally, you will see some wind blades and towers lying abandoned because of a lack of grid connection,” said Chan Ka-keung, the chief executive of clean energy private equity firm Nature Elements Capital. “You may ask why the developers just put them there. I can tell you it’s because nobody will steal them. They are too heavy.”

According to the China Wind Energy Association, more than 20 per cent of the nation’s installed wind power capacity was not generating any electricity last year. The reason: the plants were not connected to grids and on average three to four months were needed to get them hooked up.

One study by clean energy projects investor and consultancy Azure International found that the utilisation rate of mainland wind farms averaged 23 per cent in 2007, much lower than 34 per cent of projects operating in the United States.

While differences in wind resources could partly explain the disparity, insufficient investment in grid connections also played a part.

“The problem is that the regions where wind resources are the most abundant tend to have the weakest grid infrastructure development,” association president He Dexin said. “Much faster than expected growth in installation in the past two years has created a bottleneck.”

In addition, some wind farms are generating more power than earlier estimated, and their output has been rejected by the local grid companies because of concerns it would overload their systems.

For power distributors there is little incentive to invest in extra grid lines to remote wind farms because while Beijing has subsidised wind power generation, the grid operators are only getting the same tariff as power generated from coal.

Wind farms are generally of smaller generation capacity than coal-fired power plants and are less stable in output since it is subject to variable wind speed. As a result, the return on investment from wind power is lower for grid operators.

London-based Robin Batchelor, who manages BlackRock’s World Energy Fund and New Energy Fund, said: “China has targets for megawatts [capacity] of wind farms but not targets for megawatt-hours [power output]. A significant portion of wind farms that are built are not connected to the grid.”

Since grid companies are wholly state-owned and are not answerable to individual investors, their incentive to link up with wind farms is limited.

Despite the system’s failings, Mr He believes the central government’s new development plan for the sector will be enough to address the issues.

“This problem is not unique to China. It happens overseas too, although not to the same magnitude,” he said. “I believe the NDRC will plan for sufficient infrastructure to be built to cater for the need of its new 2020 target for wind farm development.”

State Grid Corp of China, which operates power grids in all but five southern regions, plans to build 15 ultra-high voltage power transmission corridors by 2020, including connections between wind resource-rich Inner Mongolia and the key consumption region of Beijing-Datang-Tianjin as well as between Ningxia autonomous region just south of Inner Mongolia and east China.

Construction of such super-efficient “power transmission highways” will be complemented by the deployment of “smart grid” technology, which will enhance reliability and efficiency by routing power in more optimal ways to respond to fluctuating demand and diversifying supply sources.

They will provide long-term solutions to ease the grid bottleneck and enhance the competitiveness of clean energy, which will play the role of supplementing mainstay coal-fired power generation during peak usage periods.

However, the inefficiencies will take time to resolve. In addition to a lack of financial incentives for distribution companies, industry executives said another cause of the bottleneck in grid infrastructure was poor planning, exacerbated by a two-tiered project approval system.

Under existing regulations, projects smaller than 50MW only require approval from local governments. The central government, however, tenders concessions for large-scale projects of 100MW or above.

By approving large projects, Beijing hopes to ensure wind farms are built in sites already determined to be suitable, and that economies of scale will drive down operating and equipment costs.

Together with the implementation of local content requirements on equipment, Beijing has been successful in forcing foreign suppliers to build significant production capacity and bring manufacturing know-how and employment to the mainland.

The ultimate goal is to substitute imports of equipment with domestic production and build an industry competitive enough to export.

But Beijing’s adoption of a “lowest power price wins” tendering policy a few years ago has resulted in overly aggressive bidding by state-owned power generation companies eager to meet their renewable energy capacity targets even at the expense of prospective losses on such projects.

This has raised concerns that project developers would be forced to cut corners and make sacrifices on equipment quality.

“The quality of wind turbines are a concern, particularly when more and more projects are built in Inner Mongolia or Gansu where there is extreme weather. There has been little track record on how well domestic turbines will stand extreme weather,” said Mr Chan, a former managing director of renewable energy at Hong Kong utility CLP Holdings (SEHK: 0002).

Beijing’s policy has driven many private companies to negotiate directly with local governments. Many have been “squatting” on “exclusive rights” to develop projects in what they think are the best sites.

Such a mad rush by developers to build projects with local governments has made it hard for the power distributors to project future demand for grid infrastructure.

Disorderly development has meant grid companies cannot plan properly for grid construction, resulting in wasted grid capacity in some areas and shortages in others.

“It is a chicken and egg issue. I think better co-ordination is key, particularly given stimulus packages to boost renewable energy development are being planned by central and local governments,” Mr Chan said.

Mr He said Beijing changed its policy early last year so that new projects were chosen based on a wider ranger of criteria.

“Under the new system, the bid price will only account for a quarter of the assessment. Bidders’ experience, financial strength and the quality of equipment used will constitute the remainder,” he said, adding projects approved by local governments will also need to have their tariffs scrutinised by Beijing.

And further reform is on the way. Li Junfeng, a deputy director-general of the NDRC’s Energy Research Institute, was quoted by Shanghai Securities News as saying that the central government plans to standardise wind power tariffs by regions, so that regions with similar wind resources would be granted similar tariffs.

Mr Liu said such standardisation had already been put in practice in many regions in the past two years, with a tariff of 61 fen per kilowatt-hour in northeast China, 54 fen in eastern Inner Mongolia and 51 fen in western Inner Mongolia.

“The principle is the better the wind resources, the lower the tariffs,” he said.

BOC (SEHK: 3988) International analyst Peter Yao Sheng said in a research note that the development meant the profitability of wind power projects had improved markedly from several years ago.

“Those [tariffs] for large wind farms of over 100MW might gradually approach provincial benchmarks,” he wrote. “This will introduce a more orderly market, and early entrants with large scale project pipelines, such as China Windpower and China Power (SEHK: 2380) New Energy, will reap the benefits as their projects commence operations.”

He added that profits would also be underpinned by improving grid connections and rising income from emissions reduction credits trading as well as lower equipment and financing costs.